Currencies React to Signs of Global Economic Stabilization

Posted July 14, 2009

The yen weakened against most currencies as signs of global recovery strengthened driving investors to higher yielding assets. The Russian ruble and Canadian dollars rose as crude oil prices increased. The South African rand strengthened on rising commodity prices.

 

The yen fell as investors felt more confident about moving money into higher yielding assets.  This confidence arose from the Goldman Sachs Group, Inc. earnings report that reflected higher than anticipated earnings.  The yen fell against the US, Australian, and New Zealand dollars.

US Treasury Secretary Timothy Geithner also contributed to the growing confidence in investors by stating in a recent speech that there are signs of a growing and sustainable stabilization in the global economy.  This statement came on top of one made by President Barack Obama warning Americans and the rest of the world that recovery from the recession will be slow.

The yen weakened to 93.12 yen per dollar.  It also fell against the Australian dollar to 73.68 yen and the New Zealand dollar to 59.29 yen.  It weakened against the euro to 130.24 yen.  Both Australia and New Zealand believe there is a possibility their respective economies will improve earlier and faster than in other countries.

The euro held at US$1.3896.  The euro fell against the UK pound to 85.71 pence per euro.  The UK home prices for June rose for the first time in the last twenty months leading to a stronger pound.

Canada’s dollar strengthened against the US dollar as crude oil prices increased to over $61.  The loonie rose to 87.34 US cents or C$1.1449 against the US dollar.  This was the highest level seen in three weeks and it is expected to continue its rise according to analyst forecasts until reaching C$1.12.

The South African rand began strengthening against the US dollar as precious metal prices rose.  The rand increased to 8.1553 rand per US dollar. It also rose against the euro to 11.4436 rand.  The increase in metal prices is partly due to the increasing confidence a global recovery is in the very early stages.  South Africa’s economy is heavily dependent on metal exports and the projections show expected improvements are developing.

Gold and platinum prices have been falling recently but that trend was reversed when gold rose to $923.54 per ounce and platinum reached $1,125.25 per ounce.

The Russian ruble increased against the US dollar as the crude oil prices rose.  The ruble strengthened to 32.2247 rubles per dollar which was a 1.7 percent increase.  The ruble also rose to 45.1285 rubles per euro.

Economists believe the Russian central bank spent up to US$2 billion yesterday to support the ruble.  The exchange rate for the ruble against the currency basket composed of US dollars (55 percent) and euros (45 percent) advanced to 38.0620 rubles.  The currency band defended by the Russian central bank is between 26 and 41.

Brazil’s real also rose as oil and commodity prices increased.  The real strengthened to 1.9672 real per US dollar.

The expected pace of economic recovery is a common concern among global economies.  The US Treasury Secretary Geithner, in the same speech mentioned earlier, made this summary comment: “This crisis has been brutal in the extent and severity of damage to economies around the world.  Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.”

There is much concern about the ability of the US to handle its debt.  The country’s budget deficit grew to over $1 trillion for the first time in its history and will reach $1.8 trillion by the end of the 2009 fiscal year on 30-September-2009.  The US will need to raise substantial amounts of debt funding and the only way that will be possible is if the world’s investors believe the US is working on improving fiscal responsibility.

 

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